## Introductory Econometrics International Edition 5th Edition by Jeffrey M. Wooldridge – Test Bank

Chapter 7

1. A _____ variable is used to incorporate qualitative information in a regression model.

a. dependent

b. continuous

c. binomial

d. dummy

Answer: d

Difficulty: Easy

Bloom’s: Knowledge

A-Head: Describing Qualitative Information

BUSPROG:

Feedback: A dummy variable or binary variable is used to incorporate qualitative information in a regression model.

2. In a regression model, which of the following will be described using a binary variable?

a. Whether it rained on a particular day or it did not

b. The volume of rainfall during a year

c. The percentage of humidity in air on a particular day

d. The concentration of dust particles in air

Answer: a

Difficulty: Medium

Bloom’s: Comprehension

A-Head: Describing Qualitative Information

BUSPROG:

Feedback: A binary variable is used to describe qualitative information in regression model. Therefore, such a variable will be used to describe whether it rained on a particular day or it did not.

3. Which of the following is true of dummy variables?

a. A dummy variable always takes a value less than 1.

b. A dummy variable always takes a value higher than 1.

c. A dummy variable takes a value of 0 or 1.

d. A dummy variable takes a value of 1 or 10.

Answer: c

Difficulty: Easy

Bloom’s: Knowledge

A-Head: Describing Qualitative Information

BUSPROG:

Feedback: A dummy variable takes a value of 0 or 1.

The following simple model is used to determine the annual savings of an individual on the basis of his annual income and education.

Savings = β0+∂0 Edu + β1Inc+u

The variable ‘Edu’ takes a value of 1 if the person is educated and the variable ‘Inc’ measures the income of the individual.

4. Refer to the model above. The inclusion of another binary variable in this model that takes a value of 1 if a person is uneducated, will give rise to the problem of _____.

a. omitted variable bias

b. self-selection

c. dummy variable trap

d. heteroskedastcity

Answer: c

Difficulty: Medium

Bloom’s: Application

A-Head: Describing Qualitative Information

BUSPROG: Analytic

Feedback: The inclusion of another dummy variable in this model would introduce perfect collinearity and lead to a dummy variable trap.

The following simple model is used to determine the annual savings of an individual on the basis of his annual income and education.

Savings = β0+∂0 Edu + β1Inc+u

The variable ‘Edu’ takes a value of 1 if the person is educated and the variable ‘Inc’ measures the income of the individual.

5. Refer to the model above. The benchmark group in this model is _____.

a. the group of educated people

b. the group of uneducated people

c. the group of individuals with a high income

d. the group of individuals with a low income

Answer: b

Difficulty: Moderate

Bloom’s: Application

A-Head: A Single Dummy Independent Variable

BUSPROG: Analytic

Feedback: The benchmark group is the group against which comparisons are made. In this case, the savings of a literate person is being compared to the savings of an illiterate person; therefore, the group of illiterate people is the base group or benchmark group.

The following simple model is used to determine the annual savings of an individual on the basis of his annual income and education.

Savings = β0+∂0 Edu + β1Inc+u

The variable ‘Edu’ takes a value of 1 if the person is educated and the variable ‘Inc’ measures the income of the individual.

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